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Separation of ecommerce and brick-n-mortar?

Hello,

I'm starting an ecommerce site with my brother-in-law, and I have a couple questions about how to proceed.

Currently, he is the sole owner of a brick-n-mortar store, and is doing reasonably well. We have talked about opening an ecommerce store selling the same goods for some time, and are finally doing it. He is handling the marketing and goods procurement side of it, and I am handling the building and maintenance of the site itself, and we are splitting the profit.

The main problem I forsee is tax-related. He wants the site to have directions to his shop and be named after the shop as well, so that it doubles as a marketing tool for local users. The problem that I see with this is that from a tax-standpoint, the government may look at this business as an extension of this brick-n-mortar shop and tax accordingly (taxes that I should not have to pay). Am I correct in making this assumption? If so, how separated from the brick-n-mortar shop does the ecommerce shop need to be in order to be considered a separate business from a taxation standpoint?

If the ecommerce site is started as a separate LLC, is this enough to avoid being taxed as if the site is an extension of the physical store? What if the ecommerce store has the same name as this store with a .com slapped on the end? What if it has directions to the physical store on it?

doesn't matter. all they care about is what EIN the revenues are being streamed through. I suggest talking to your accountant about this. make sure you have prof. advice on this, not just a few posts from the board. Good luck with your new venuture!

I'm not sure I agree with the suggestion to form a new LLC or partnership around the website. Here's why:

1. It's not even known what kind of entity the existing store is (i.e. corp/llc/etc) so it may not be tax advantageous to create an LLC for the online part.

2. There are insurance and other aspects of retailing that might make this confusing. If you seperate them, isn't the store still fulfilling the orders? If so, the profit has to be adjusted for fixed costs that the store incurs like electricity, etc. This could get confusing.

3. The whole idea of seperation will take something that's simple (adding a new sales/marketing channel to an existing business) and make it complex (trying to keep things seperate when they are going to be intertwined).

4. If you are going to do business with any partner, you want to share in the responsibilities and beneifts of business ownership. By trying to make this divide between you two, you're breaking up the business before it even gets started.

From what little I know, it sounds to me like the best way to go would be to try and find a way to work together without the overhead of an additional entity.

Why not just create the online store as part of the existing business and work out the revenues like this:

1) The owner keeps profits generated by the physical store.

2) The web developer keeps profits generated by the online store, after they've been adjusted by a few percent to make sure the owner is compensated for stocking/fulfilllment/etc.

3) To ensure that the web developer is compensated if he brings in huge amounts of business to the physical store, you write up an agreement where you'll review this periodically and if the store has increased revenues of more than x percent due to the online promotion, the web developer will being profit taking at a pre-determined percent. It's not easy to determine exactly where people are coming from, but if you are going to be partners you'll need to be able to handle this kind of thing. Under an agreement like that, the store owner would only need to pay you for sales you generated online unless a significant amount of foot traffic is generated to the store. If that happens, he'll be paying you from his increased profits and everyone gains.

Another advantage of a well structured deal as opposed to simply creating an LLC around the website is that the owner can continue handling the books and taxes as well as the fulfillment and inventory. This is much simpler, and he could just pay you a commission at the end of each month under a 1099 or even FTE status. The tax impact is fairly minimal and the accountant will have an easier time that way.

If you dont want to use his name or have directions to his store, you should come up with your own name and act as an affilate or set up a dropshipping agreement with him. That way, you are truly seperate and it's a cleaner deal.

He has the advantage, really, because he has an existing successful business.